While the risk can’t be totally ruled out, a monopoly becoming a duopoly is different from a monopoly becoming a ten player market.
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Hi Vivek,
Looking at your model.
The things which can get delayed are
-
IT Park 4 is mostly not happening by Fy17. ( The construction work is still around ground level stage ). We need to take it to fy 18
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The BEC expansion could take longer than fy19 as the track record of NESCO has been to take one expansion at a time.
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Kitchen Expansion is interesting and scale up but its tough to say will it be as profitable as we think.
If we shift IT Park 4 by 1-1.5 yrs and do not factor in BEC in fy 20 estimates the expected returns could be well impacted.
They have also appointed a CEO but do not know what role he exactly plays.
Disclosure - Have an exposure taken few months back in NESCO. Have been getting in and out over the last 5-7 years.
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Thanks @nooreshtech . Great to know your views.
Yes, execution delay is a potential risk (as mentioned in the slide as well). IT Park 4 was to be started by FY’16 initially and now it has pushed further.
To build margin of safety, I have taken very low occupancy rates in initial years. Ideally, the buildings gets almost 50% advance booking for leasing but have ignored this.
How I view this is there is an asset which has good visibility for next 7-8 years, plans in place, excellent RoCE, funding capex with internal accruals (which is great!!).
All great companies like Mayur, Ambika cotton, Nestle, Britannia, CCL etc. had project execution delays at one point or other during their life. But I give high importance to visibility, longevity, incremental RoCE and margin of safety at current levels since my holding period generally remains 5+ years.
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I am tracking this co for last many years and have built up good investment in the shares and found that the low dividend is compensated by increase in share prices. It requires subdivision of shares to have better liquidity and then only mutual funds would be interested .
Great model, Vivek! I just have a few questions here. IT 1&2 is old now and given the recent relaxation in FSI norms may require renovation, at least. I had a similar model, but lighter version. I was totally convinced of the potential except one hurdle. The timeline of execution and use of internal funds for capex. While internal funds is positive, I believe the incremental capex will be cash starved at least in the next 2-3 years. Especially since I think they will need to spend money on IT 1&2 itself. But ignoring the short term trends, I do see incremental value in this company in 5+ years. Stock wise, shareholder returns should be 8% to 19% CAGR, worst case to best case.
Discl: not invested
Samsung India to lease 1lakh sqft space at Oberoi Realty’s Commerz building
Samsung will pay Rs135 per sqft as monthly rental with an advance payment for six months. The deal has been signed for the next five years.
Just opposite nesco above transaction has taken place. If nesco completes IT 4 fast and leases out the profits would skyrocket.
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Thanks @sivaprakasamp
They have reconstruction plan of 1&2 in the pipeline but that will be after they finish new buildings.
Yes, there might be chances of delay in execution. That’s there with all companies doing capex.
The incremental value will kick in in next 3-12 months as soon as kitchen is ready in April and further building 4 is ready in a year.
On returns, generally if it can deliver capex with incremental 25%+ RoCE, the returns could be easilty 20% CAGR in my view.
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@vivek_mashrani bro - Have you taken into account in your valuation calculation 20 acre land parcel they have in Gujarat?
the land in Gujarat is not contiguous. These are multiple parcels spread over a largish area, according to management. so the mumbai business cannot be replicated in Gujarat at the moment.
Have only calculated actual earnings from businesses in the model.
I see… As building 4 is delayed (do we have any specific mgmt guidance as to when it might start contributing)? So we are expecting flattish 2017-18 as far as buildings 1/2/3 are concerned, as they are already operating at full occupancy.
Major push in revenues during this period can come from exhibition center (by getting more occupancy days)…right?
Kitchen is kind of start up at the moment.
Building 4 will be ready in another year as per last AGM. Also, kitchen
would have captive traffic from IT Park and BEC (see the growth in this
segment last year)
Hi Vivek. In my opinion, there would be some real impact on BEC business by Reliance Convention Centre, as and when it comes. BEC expansion is a good idea, as you have noted. Also pl note that Reliance CC would be better accessible from Airport compared to BEC. Though it may not be as easy, but someone can have access through Bandra & Kurla stations to BKC.
On business model front - Reliance can go for slightly different model - different size AC halls, some of them may be more appropriate for clients in and around BKC etc. This may impact pricing / demand for BEC…
Disc: Invested, ~3% of PF.
Ketan,
One needs entire ecosystem, proximity to national highway for goods, accessible airport for guest, client relationship, ample parking space, good brand, hotels to stay nearby, etc. which believe NESCO has advantage over.
Current BEC is very small and caters different clients than what Reliance has to offer.
Infact, I think once new modern and large BEC comes up, it will be threat for Reliance for the reason it enjoys better location advantage. Will a company think to shift per cost vs. convenience if the rates for one day are having 10% difference? I think no…!!
I am closely watching the pricing development, no impact so far. In fact NESCO is increasing price from Apr-17 to 254 per sqmt.
Disclosure: Invested
I tend to disagree with this assessment on BEC for following reasons -
- BKC is a established business area. I visit there often and compared to Goregaon, it is considered a better business location.
- More hotels in - around BKC than Goregaon
- What reliance is building will (probably) change the baseline of how conventions happen in India leading to pressure on BEC to refurbish. It’s like how Maruti changed the baseline of Cars.
- The area around NESCO is relatively crowded and traffic is a nightmare already.
Disclosure - I’m invested in Nesco at lower levels. But my investment theme is more aligned to their annuity business (i.e. IT park)
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I tend to have a different opinion. The exhibition market is very nascent in India. Compared to China and other countries, there is a huge scope for growth. Reliance has stepped into this business seeing the opportunity. Hence I believe both NESCO and Reliance can co-exist. Hence this segment may not turn out to be price sensitive.
As pointed out by Vivek, Reliance can never be as profitable as NESCO. You can’t afford to have large open spaces when the land and other assets are built on debt. Hence NESCO will continue to be in business. Reliance will just help the exhibition market to expand to a new level.
Disc: Invested
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"Reliance can never be as profitable as NESCO. " very definitive statement, @sivaprakasamp…as an investor, we shouldn’t take anything for sure/granted unless we have information…
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Agree Ketan.
If you take NESCO’s numbers, the PAT margin has steadily increased over years to the now 50%. That’s only possible if the variable expenses are fixed despite scale. Further such high margins imply -
- Nil cost of land
- Nil interest cost
- Ability to cut prices to a large extent and still remain profitable
Reliance does not have any of the above attributes. Hence NESCO has a great pricing power, which I am sure need not be exercised too.
Overall IMO, Reliance may undercut NESCO but ultimately can never be more profitable from shareholder perspective.
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Nesco reported excellent set of numbers:
Disclosure: Invested
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